XM-Sirius Merger: DOJ Clearance Surprising

Monday's DOJ clearance on the Sirius (SIRI) - XM (XMSR) merger is surprising in that the regulator chose to attach no conditions after an HSR review of more than a full year. Although this may not be unprecedented, it certainly does border on inexplicable.

Definitely inexplicable is the one of the key reasons offered by the DOJ in justifying its non-action:

Because customers must acquire equipment that is specialized to the satellite radio service to which they subscribe, and which cannot receive the other provider’s signal, there has never been significant competition for customers who have already subscribed to one or the other service.

This view clearly (and perhaps naively) overlooks the well-known fact that the companies themselves have failed to produce and market interoperable receivers as they agreed to do a decade ago. In other words, customers have been literally dissuaded from switching services directly as a result of the companies' own apathy, for lack of a better word, in offering devices which would allow more robust competition between the two entities.

The DOJ has quite literally rewarded the companies for their apparent collusion on this particular issue. (It will also be noted that the device issue did not surface in the rejected GMH (GMH) - DISH (DISH) transaction, where equipment is far more difficult to change and much more expensive than satellite radio receivers.)

Nevertheless, as one headline aptly described Monday's development, the DOJ has decided that the "XM/Sirius monopoly is not a monopoly", and there is no need to belabor the point.

The FCC review now boils down to three possible outcomes. This publications chances of each is as follows:

FCC Conditional Approval: 70%

If the FCC follows the DOJ's lead and approves without a single condition, the long- and short-term public/political backlash will be substantial. Unconditional approval would essentially send the signal that not only does the FCC have no independent authority in major merger reviews, but that the entire federal regulatory environment in the context of mergers is useless. After such a lengthy and contentious review process, the FCC is perceived to be obligated to impose at least conditions directed at pricing and at most directed at spectrum divestiture. Given the DOJ's decision, fewer conditions are the more likely outcome for this transaction.

FCC Unconditional Approval: +15%

As the FCC does consistently follow the DOJ in major merger cases, this is clearly a possible outcome. If FCC approval without conditions is granted, it would be a politicalstatement decision, rather than a legitimate regulatory decision. Obviously, this can not be ruled out under the current political environment in D.C. However, as stated above, this type of decision would have long-term implications for the FCC, either under the current leadership (if maintained) or any future leadership.

FCC Rejection (Declines License Transfer): -15%

This outcome would only occur if the FCC decided to assert its legitimacy as a regulator autonomous of the Department of Justice (again, in the context of major merger reviews). This transaction presents the most significant opportunity in recent memory, and perhaps into the foreseeable future, for the FCC to establish itself as a merger enforcer, rather than the rubber stamp it has essentially become. This, of course, is not a likely scenario given the political make-up of the current Commissioners.

In sum, the DOJ's decision not to act yesterday places the entire responsibility of this merger -- and of possible future major communications mergers -- squarely on the FCC. The FCC must have been made aware of the DOJ's intentions over the previous weekend, if not before, and presumably has increased its final decision-making activities accordingly. Assuming the FCC chooses to approve with minimal or moderate conditions, this decision can be expected within the next two to three weeks.

If this does indeed occur, the companies will be able to complete the transaction by the third week of April 2008.

Disclosure: We have no positions of any kind, in any security. We are a completely neutral source of research and analysis.

Comments

[MarkATTY]

What this author and nearly everyone else who said the merger would not go through fails to understand what the definition of a monopoly is. A monopoly is when a company can raise its proices for a product or service without losing demand. Thius is why the relevant market has to be defined-and was defined by the DOJ--broadly. A combined SIRI/XM cannot raise prices without losing subscribers because there are cheaper (FREE) alternatives they will turn to. The M&A author's failure to even understand what a monopoly strains the credibility of this site. Understand the issue before you do "analysis". This is why this sight and many others failed to understand call the DOJ's decision correctly.

[manchester]

Your percentages for future outcomes by the FCC is hysterical considering your track record thus far with the merger. You and all of the other pundits have been put in your place by the DOJ decision and the voice of consumers.

[User 163772]

Is the M&S Researcher writer incompetent or just plain stupid? Further, it does not take a rocket scientist to see that you are attempting to "save face" after the previous trash you have written.

[Joe F.]

The above comments say it all. Nothing but sour grapes from this author who can't see the nose in front of his face.
Can anybody get a column? I guess so. Time to flush the M and A along with the B and M. End of story.